Weak Chinese inflation points to more government stimulus

China's stock markets have faced a volatile year - down 25 per cent - as the economic rebalancing takes its toll (Source: Getty)

Jake Cordell

At the start of a data-heavy week for the Chinese economy, the latest inflation figures, released this morning, provided few clues about the health of the world’s second largest economy.

Prices for Chinese households grew by 2.3 per cent on the consumer prices index (CPI) measure of inflation over the 12 months to March, “a smidgen below expectations” according to Deutsche Bank and the same rate of increase registered in February.

Wholesale prices - those paid by factories - however, continued to pull in the other direction, down 4.3 per cent over the year, though this was a slower rate of deflation than in February and the first month-on-month increase for three years, raising hopes that the trough has been passed.

Food prices continued to increase at a decent clip - up 7.6 per cent over the year, compared to a 7.3 per cent rise in February. Meat and vegetable prices have shot up over the last 12 months in China - vegetables prices are up a staggering 35.8 per cent, while pork goods cost Chinese families one-quarter more than last year.

“This potentially creates a headache for China’s central bank as further monetary policy easing is clearly necessary, but out of control food price inflation could restrain their ability to ease as much as is necessary,” said Angus Nicholson, market analyst at IG.

“Further cuts to interest rates and the reserve requirement ratio will be needed to continue China’s resurgent first quarter activity momentum,” he added.

Hao Zhou, a senior analyst for Commerzbank AG, however, cautioned that "it is too early to worry about the inflation problem in China", despite warning that China would face a "bumpy landing" and will fall short of its 6.5 per cent growth target for this year.

Zhou added that he expected China to cut its interest rates from 4.35 per cent to 4.1 per cent at some point in the second quarter.

In anticipation of such stimulus measures, the Shanghai Composite jumped by 1.32 per cent after the figures were released, though all eyes will be on crucial foreign investment and loan data out tomorrow and trade data released on Wednesday.

Jasper Lawler, market analyst at CMC Markets, warned that when instigating reforms "the risk is that authorities are covering over the cracks by adding more debt to an already over-levered banking system".

Chinese exports fell by 25 per cent in February 2016 - the sharpest fall since 2009 - while imports have fallen by nearly half since 2014. At the same time, the amount of debt in China has been on the rise. Outstanding loans are expected to have grown by 14.5 per cent over the last year.

Societe Generale predicted "decidedly upbeat" data to trickle through for the rest of the week, with "growth in exports, industrial production, fixed asset investment and retail sales".